Individuals in Pennsylvania and around the country who are concerned about estate taxes frequently place their assets into irrevocable trusts. However, this strategy has a number of drawbacks. Once an irrevocable trust is in place, the assets placed into it are beyond reach and its terms can only be terminated or amended with the permission of the beneficiary or beneficiaries. This leaves grantors with few options if their circumstances change and they need to switch beneficiaries, modify provisions or access trust assets.
Qualified tuition plans are becoming a popular alternative to irrevocable trusts because they do not have these limitations. QTPs, which are more commonly known as 529 plans because the rules dealing with them can be found in the Internal Revenue Code’s Section 529, provide tax benefits to individuals who set money aside to pay tuition fees and other education costs. These tax benefits are lost if the funds are withdrawn and used for another purpose, but they are far more flexible in this regard than irrevocable trusts. It is also far easier to change beneficiaries with a 529 plan.
People who choose to put money into 529 plans usually do so to cover the costs of sending their children to college, but the IRS allows other relatives such as grandchildren, nieces and nephews to be listed as beneficiaries. In addition to reducing estate tax exposure, 529 plans allow individuals to frontload up to 10 years of annual gifts. This means that federal gift taxes are not incurred even when $150,000 is placed into a 529 plan.
Irrevocable trusts remain a prudent way to reduce estate taxes for individuals who do not have beneficiaries who will be attending college. In these situations, experienced estate planning attorneys may suggest appointing a trust protector to settle conflicts between beneficiaries and trustees or intervene when trustees violate their fiduciary duties.